Does a Flurry of Deals Mean Mergers Are Back?

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Dell (DELL) is forking over $2.4 billion to acquire Quest Software (QSFT), having won a bidding war for the company. Bristol-Myers Squibb (BMY) is snapping up Amylin Pharmaceuticals (AMLN) for $5.3 billion, acquiring in the process the latter's diabetes drugs. Anheuser Busch InBev (BUD) plans to buy the half of Grupo Modelo (GPMCY) that it doesn't already own for $20.1 billion, and that's not all. It seems as if there's hardly a big corporate name that hasn't made headlines of late as a result of some acquisition that they are planning or contemplating: General Electric (GE), Microsoft (MSFT), Nestle (NSRGY), Glencore (LSE: GLEN), to name only a few.

The flurry of deals can't be too large for global investment banks, however. Regardless of who is doing the measuring, M&A activity is in the doldrums, adding to the woes of firms like Goldman Sachs (GS) and Morgan Stanley (MS), who generate revenues from advising companies on these deals. According to the midyear report from Mergermarket, global M&A is down 21.4 percent from the first half of 2011, and activity in the United States was the slowest in any half-year period measured since 2003, with only $258.7 billion in deals done, down 40.1 percent from last year.

The irony is that corporate America is still sitting on a $2 trillion-plus mountain of cash, apparently unwilling to pay out big special dividends or invest it in acquisitions. And banks, while they may not be excited about extending credit to individuals in the form of mortgages, car loans or unsecured credit cards, are likely to be quite happy about earning even a razor thin margin on merger financing – especially if funding those deals enables them to capture a fee for advising on the transaction. And yet, corporate boards appear underwhelmed, whether it's by the kind of deals they see as being possible or by the very notion of M&A.

The culprit, argues Ernst & Young based on a new survey, is the economic slowdown. Of the companies and directors it polled, 55 percent now say they are focusing on growth, and organic growth at that. If anything, companies are more interested in selling non-core assets, Ernst & Young said in the report released yesterday, with 34 percent responding that they are interested in disposing of business divisions or other assets in the coming 12 months, whether through outright sales, carve-outs or spinoffs. But who will be buying?

It's not that buyers are absent, only that their appetite for deals seems to be more muted. The private equity industry may have a lot of capital to invest in fresh acquisitions, but the IPO market has stalled and a slump in other exit options may be making buyout investors more cautious when it comes to putting capital into new deals. It's no coincidence that while private equity exits fell 30 percent in the first half of 2012 over year earlier levels, new buyouts fell by some 20 percent, according to Mergermarket data.

One of the only sectors in which the value of transactions rose during the first half of the year was energy. Although the number of transactions fell 26 percent, according to data from Ernst & Young, the value rose 37 percent to $55.8 billion, despite the fact that both crude oil and natural gas prices spent most of the second quarter in steady decline.

But those trends seem to support the conclusions E&Y drew elsewhere: Energy exploration and production companies are under pressure to rationalize their holdings as their revenues are threatened by those low commodity prices. In some cases, sellers likely opted to unload assets rather than bringing them onstream or leaving them idle; buyers may have been able to pick up productive oil and gas assets at a relative discount. Another hot spot was the "clean tech" arena, where, in spite of the slump in solar energy in recent years, dealflow soared 41 percent in the first quarter alone, according to an earlier report from Ernst & Young.

The real reason that the M&A activity is generally in a slump, however, has less to do with the Eurozone's woes than it does to the uncertainty that has prevailed since the financial crisis first threatened in 2007. When corporate boards are anxious about what the future may hold, their reluctance to sign off on costly acquisitions grows still stronger – especially when they ponder the harsh truth, proven by one academic study after another, that only a minority of such acquisitions actually generate value for shareholders over the long haul.

Far better wait, they may well reason, until there is some kind of consensus on what happens next. Given that slow growth in the United States and the Eurozone's debt crisis are taking a toll on markets as far afield as Brazil, India and China, it may be harder than usual to rationalize an offshore acquisition as a way to generate growth from higher-growth overseas markets.

Investment banks may view the flurry of deals in the last few days as a hopeful sign, but the odds are that the second half of 2012 will end up being an underwhelming one for merger advisors and other dealmakers at corporate law firms. Look for companies to spend more money on hiring, and then perhaps on new technology, before they go in quest of an acquisition that may or may not pay off in the form of higher growth rates.

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.